Putting together the 500-piece Social Security puzzle

DanielleHoward, CFP

Columnist

I love putting puzzles together. My daughter and I compete every year at Christmas to put together two 85-piece round ornaments. Over time, I have come up with a strategy that works pretty well, and while my eyesight isn’t what it used to be, I can still hold my own.

There are over 500 different pieces to the Social Security puzzle that you need to strategically look at to maximize what you can get. Over a lifetime, this can amount to hundreds of thousands of dollars in retirement savings gained.

There are four components in determining how much you will receive:

• Based on your full retirement age, Social Security looks back on your earnings history and calculates your “primary insurance amount” on the highest 35 year earnings.

• Your age when you decide to apply for benefits. There are reductions if you take it earlier than full retirement and your benefits increase if you delay.

• Your marital status. You may be single, married, widowed or divorced and you need to know how your benefits are impacted by these, or change when you experience a life transition. This is a whole can of worms. For example, Bob and Sally each get a benefit based on their own earnings, say $2,200 a month each. When one passes away, the other will continue to receive their own $2,200 a month, but not both. The survivor would experience a 50% decrease in income. If the deceased spouse’s benefit was higher than the survivor, you can switch, but you can’t receive both payouts.

• Life expectancy. While unknown for most of us, you can make a calculated guess based on your family history and lifestyle. Your Social Security benefit is a financial hedge against the risk of outliving your money.

When you peel apart the layered nuances in each of these, it reveals how your potential benefits best fit into your life plan.

A wise strategy would be to use all the complicated rules to your advantage. How do you get an advantage? You educate yourself. It is vital to understand that this may involve combining or postponing benefits given your particular situation. You want to compare different options as you discern what the best fit is for you and your family. Your age, marital status, life expectancy, total assets available, asset liquidity, needed income, desired standard of living, Inflation, work status, and survivor needs all play into the equation. Social Security cannot be looked at in a vacuum.

Retirement spousal benefits have changed. With the Bipartisan Budget Act of 2015, two popular claiming strategies no longer exist. The “File and Suspend” and “filing a Restricted application” allowed married couples to get more in benefits. Even with these two options off the table, there are other important things to know about your claiming decisions.

Keep these things in mind:

• Unlike your own, personal record that has delayed retirement credits, spousal benefits do not grow. A spousal benefit allows you to take 50% of your spouse’s Social Security as calculated at their full retirement.

• Only one person in a couple can receive spousal benefits at a time.

• Your benefits are reduced if you claim before your own full retirement.

• If you turned 62 before December 31, 2015, you can still file a restricted application for spousal benefits and allow your own benefits to continue to grow until age 70.

• If you turned 62 after Dec. 31, 2015, once your own record has been “opened”, you can’t claim a spousal benefit unless it is larger than your own.

• To collect a spousal benefit, you must have been married for a full year.

Social Security taxation:

If you receive income from other sources, your social security will be taxed if your adjusted gross income (AGI) + nontaxable interest + ½ your Social Security benefits is more than $32,000 for married couples filing jointly and $25,000 for single taxpayers. Get creative with how you take money from your asset buckets, and you may be able to minimize the taxes paid on Social Security as well as what Medicare premiums you will pay. For example, if you are taking required minimum distributions (RMD) off your IRA, you can have that go directly to a charitable organization you care about. This would lower your AGI and possibly lower the premiums you pay for Medicare.

This is a puzzle you must take the time to put together. When you maximize what you get out of Social Security, your other assets can continue to work hard for you and give you peace of mind as you live a life with no regrets in retirement.

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